The US dollar’s recent decline against the Japanese yen has sparked concerns about a potential unwinding of the yen-carry trade, a strategy that involves borrowing yen at low interest rates to invest in higher-yielding assets. This could lead to significant pressure on long-term US Treasuries and risk assets, potentially echoing the global market crash of August 2024.
Chinese exporters are increasingly holding onto US dollars rather than converting them to yuan, a practice known as the yuan carry trade. This trend, driven by higher US interest rates, is causing concerns about the yuan’s value and could potentially lead to economic instability in China.
The Indian rupee plummeted to a record low on Wednesday, driven by the unwinding of carry trades and increased dollar demand from importers. Despite intervention from the Reserve Bank of India, the rupee continues to face pressure from investors exiting carry trades that used the Chinese yuan and Japanese yen. Experts anticipate continued downward pressure on the rupee in the near term.
